Life and Times of Kalyan

How to manage your Finance

The much dreaded F word. No, not THAT word dear, I mean F for FINANCE. Passing out of college, you started earning some real good bucks. After a year of working, and hectic spending, you compare your finances with another guy and find yourself in a mess. Danny earned more or less the same like you, yet after 3 years he has a decent portfolio and you’re still struggling to understand words like ELSS, 80c, PPF, SIP, Term plan. Several of young turks face a similar situation. Situation, that could’ve been averted by careful and easy planning right from the day you get your first salary. Start right now, if not already yet. Here’re some quick tips on how you can manage your finance and start building a balanced portfolio. The list below is no way exhaustive, but definitely tries to summarize the need and the way to build a balanced portfolio.

Life InsuranceIf you don’t have any dependents (parents, spouse, children etc who depend on you financially), don’t go for life insurance . In case you have dependents, insuring your life should be your top priority. It will take care of financial needs of your dependents even when you aren’t around anymore. Ideally, death benefit of your insurance policy should be 3 times your annual take-home. Life Insurance plans come in three forms – Term Plans, Endowment Plans and ULIPs. You agent will pester you for ULIPs all the time, but a Term Plan is suggested. Why, later in another article. Further, you also get tax benefits under section 80c of Indian IT Act.

Savings Account

Have some liquidity. Keeping a target to build a fund of 45 days of your salary, start building this fund with 10% of your monthly take-home. This will ensure that at the end of15 months, you would have enough liquidity to take care of any emergency like medical exigency, no-job period etc.

Mediclaim/Health Insurance

OK, you’re young. But that doesn’t mean you’ll never have medical emergencies. Mediclaim takes care of your hospital bills (of course subject to some conditions) while Health Insurance by several agencies insure you against critical illness like cance, diabetes etc. Further, you also get a tax benefit (currently, max INR 10000) on this.

ELSS

It means Equity Linked Savings Scheme, and is the only equity-based tax saving instrument. It offers twin benefits of tax benefits and capital gains. Considering the projected growth in Indian economy in the next few years coupled with strong corporate performances, ELSS is the most lucrative of all tax saving schemes. It has a mandatory lock-in of 3 years, which is beneficial since you are saved from short-term volatility. Best way to go for it is through a SIP (Systematic Investment Plan) route. Essentially, it means you invest a fixed amount in ELSS every month. This will average your costs in the long run (i.e. when market are low, you get more units. And when market is high, you get more units. Thus, the total cost you incur is averaged).

Debt Repayment

Pay your debts on a regular basis. At the very onset, deciding the timeframe in which you want to repay the debt helps. Educational Loan interest repayment is tax-free (section 80d). For home-loans, principal (section 80c, limit: 1 lakh) as well as interest (section 24b, limit 1.5 lakh) can be claimed tax-free.

PPF

People with low-risk appetite can opt for Public Provident Fund. It gives annual returns of 8% (compound interest), is a tax-saving scheme and the returns are tax-free as well. This means, when you invest in PPF you get tax rebate, and when you withdraw your profits are again tax-free. The only rider – you cannot withdraw your invested money before 15 years. But in a sense its good, since you have something as forced-savings. Also, this is exempt from wealth tax. This means that if you declare bankruptcy and are not able repay your debt, this money cannot be taken way from you by any court. My suggestion would be invest 5% of monthly take-home in PPF per month.

Rest

The rest of money you can put in one or more of these asset classes – Gold, Mutual Funds, Equity, Realty etc. It depends on your risk appetite and of course, quantum of money available. I would talk about these in some later article.

Summary

Here is my suggestion of an ideal mix, as a percentage of total take-home.

Insurance -5 (lesser, if term plan taken)

Mediclaim -2 to 5

Debt Repayment – 10

Saving Account -10

ELSS -15 (lesser, if take-home more than 40K pm)

PPF – 5

Rest – 25 to 50 depending on your expenses

I would discuss each of the above heads in separate articles in due course of time.

HAPPY PLANNING

Update: Keeping the current recession in mind, building a fund that takes care of 6 months of expenses is required. So, save more aggressively than ever before. Accordingly, the figures in this post would change. Thanks Himanshu for the suggestion.

5 Responses

Life insurance is not necessarily for dependants.There are other schemes where you get insurance cover as well as pension scheme benefits/returns.. all of which are eligible for tax savings under 80c.Investor can talk to the agents and then decide his investment according to his appetite for risk.

Monami:
There is no point in taking Life Insurance if you don’t have any dependent (who the hell will use the money in that case?).

Further, I personally don’t like and recommend Pension plans for the simple reason they provide far less returns than Mutual Funds in say 5 years. People of my age have seen the stock markets rise spectacularly in last 3 years and hence, are impatient than say, a person 10 years older. But yes, if the investment horizon is larger, say 20 years, Pension plans are definitely better than Mutual Funds.

I feel that the liquid cash available to one should be such that one can survive for six months if by chance one is out of job. So suggesting that instead of 45 days salary, the savings should be equal to 180 days expenses.

Most Read Posts

Line I Like

"Men are like a snakes. Their myth far exceeds their reality. Most of the snakes are toothless. Few have fangs. And those who do have poison sacks, can be charmed. It isn't difficult"
The Alchemy of Desire by Tarun Tejpal